Climate change exposure and internal carbon pricing adoption

Abstract

AbstractGovernments and corporations around the world are increasingly pressured to manage climate‐related business risks and reduce their carbon footprint. Consequently, a growing number of corporations have started implementing internal carbon pricing (ICP) programs, assigning a monetary value to their carbon emissions as a mitigation and adaptation mechanism. This paper explores the motives underlying voluntary ICP adoption and examines whether a firm's exposure to climate‐related risks is a relevant driver of ICP adoption. Using a worldwide sample of firms reporting to the Carbon Disclosure Project between 2016 and 2018, we find that firm‐level climate change exposure is significantly and positively related to the likelihood of ICP adoption. More specifically, the probability of adoption is largely linked to regulatory shocks and opportunity exposure. Moreover, we find that board independence acts as a moderator in the climate change exposure–ICP adoption relation. The findings of this study shed light on the factors contributing to the acceleration in ICP implementation in the context of a coordinated effort between public and private sectors to reduce global emissions.